Question

please identify and briefly describe the main economic functions of government. What function do you think is the most controversial? Explain why.

Answer 1

The government has many functions, which extend beyond the scope of economics. However, the main economic functions are:

• to set-up a legal and social system
• promote and regulate markets
• raise revenues and arrange for public goods and services
• reduce inequality and poverty
• rectify market failures such as externalities, monopoly etc.
• stabilize the economy using fiscal and monetary policies

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Out of these, the functions that interfere with economic efficiency are controversial. The second point, pertaining to regulation of markets, is often debated.

It is argued that the government has no role in regulating the market and interfering with the level of competition. The market forces, guided by the invisible hand, will take the market to an optimal state. Thus, there is huge controversy over whether the government should regulate markets and if it does, to what extent should it be done.